Introduction to Social Stock Exchange (SSE)
The Social Stock Exchange (SSE) is an innovative platform designed to support social enterprises in raising funds through a regulated mechanism. This not only ensures transparency and accountability, but also fosters periodic reporting on social impact. The SSE aims to create a vibrant, deep, and liquid market for social investments, necessitating the provision of tax incentives to attract investors supporting various social causes. These tax incentives play a crucial role in energizing the social sector and enabling organizations to scale their efforts.
Social enterprises, including both non-profit organizations (NPOs) and for-profit entities (FPEs), need to engage investors by offering attractive tax benefits to promote social development through SSE.
Legal Framework for Non-Profit Organizations (NPOs)
Non-profit organizations (NPOs) are registered under Section 12AB of the Income Tax Act to avail tax-exempt status. These organizations include trusts, societies, and not-for-profit companies, and they must comply with certain regulations, including filing income tax returns. Once their returns are assessed, they receive a tax-exempt status for that year. Furthermore, under Section 80G of the Income Tax Act, NPOs can offer tax deductions to donors, further incentivizing charitable contributions.
Funding for NPOs generally comes from four primary sources:
- Individual donations
- Contributions under the Foreign Contribution (Regulation) Act, 2010 (FCRA)
- Corporate Social Responsibility (CSR) grants
- Government grants and schemes
These funding avenues help ensure the sustainability and growth of NPOs, which is why offering tax incentives to investors is vital for the success of social enterprises on the SSE.
Securities Transaction Tax (STT) on Social Enterprises
The Securities Transaction Tax (STT) is a levy on the sale and purchase of securities on a stock exchange platform. This tax is applicable to equity shares, business NPOs, and equity-oriented mutual funds. The STT is collected by the recognized stock exchange or trustee of a mutual fund and is remitted to the Central Government.
STT Rates:
- Purchase and Sale of Equity Shares (Delivery-based): 0.1% on the sale/purchase price (payable by both the buyer and seller)
- Purchase and Sale of Equity Shares or Units (Intraday): 0.025% on the sale price (payable by the seller)
- Sale/Redemption of Units of Equity-Oriented Mutual Funds: 0.001% on the sale price (payable by the seller)
These rates apply to securities traded on the stock exchange in India, excluding debt securities or debt mutual funds.
Tax Deductions under Section 80G of the Income Tax Act
Section 80G of the Income Tax Act enables individuals and entities to claim deductions on donations made to eligible charitable institutions. NPOs that are registered under Section 80G are given a registration number by the Income Tax Department, which must be present on the receipt provided to donors.
Categories of Donations under Section 80G:
- 100% Deduction (Available without any qualifying limit)
- Donations to national funds such as the National Defence Fund and PM CARES Fund.
- 50% Deduction (Available without any qualifying limit)
- Donations to funds like the Prime Minister’s Drought Relief Fund.
- 100% Deduction (Up to 10% of Adjusted Gross Total Income)
- Donations to local authorities or government entities for promoting family planning.
- 50% Deduction (Up to 10% of Adjusted Gross Total Income)
- Donations to government or local authorities for charitable purposes other than family planning.
Conditions for Donations under Section 80G:
- Donations above Rs. 2,000 must be made through non-cash methods (e.g., cheque, bank transfer).
- Donations that qualify for tax deductions must be supported by proper documentation from the charitable institution.
Exemptions for Social Enterprises
To benefit from income tax exemptions, social enterprises (NPOs) must obtain registration under Section 12AB of the Income Tax Act. NPOs currently registered under Section 12AA must apply for this fresh registration.
Exemptions under the Income Tax Act:
- Income from property held for charitable purposes is exempt under Section 11.
- NPOs must apply at least 85% of their annual income towards charitable objectives, with the possibility of accumulating the unspent amount for future use within a maximum period of five years.
- Donations specifically designated for the corpus fund are exempt from tax, but these funds must be invested in specified assets.
Restrictions on Exemptions:
- If the NPO’s income or property benefits certain individuals (e.g., founders, trustees), it loses its tax-exempt status.
- Exemptions are not available for income from business activities unless the business is incidental to the NPO’s primary objectives.
- Anonymous donations received by NPOs, unless in a fully religious context, are taxed at 30%.
Compliance and Documentation for NPOs
To maintain their tax-exempt status, NPOs must adhere to several compliance requirements, including:
- Proper maintenance of accounts in line with legal stipulations.
- Filing income tax returns on time and having their accounts audited by a Chartered Accountant.
- Issuing certificates to donors in Form 10 BE.
NPOs must also comply with additional guidelines and regulations as prescribed by the Income Tax Department, including maintaining transparency in the receipt and usage of donations.
Conclusion
The tax framework surrounding Social Stock Exchanges, NPOs, and Social Enterprises is designed to incentivize and promote the growth of the social sector in India. By offering tax exemptions, deductions, and specific guidelines for compliance, the government ensures that both NPOs and their donors benefit from a tax-efficient environment. This encourages greater participation in social enterprises, ultimately fostering positive social change.
The SSE, combined with these tax incentives, holds the potential to create a vibrant and transparent ecosystem for social investments that will benefit both the investors and the larger community.